05/21/2012

FACEBOOK IPO FLOPS: MAIN ST INVESTORS WORRIED FACEBOOK IS OVER-VALUED, STOCK OPENS UP 11%, BUT IT SLIDES AND ENDS AT $38.23

Facebook CEO and co-founder Mark Zuckerberg rings the bell for the start of trading of Facebook shares on NASDAQ from Facebook's HQ in Menlo Park, California (Click Image To Enlarge)

Facebook Inc. NASDAQ:FB took eight years to stage one of the most anticipated initial public offerings ever. The anticlimax came today, Friday, May 18, 2012, as Wall Street bankers struggled to prevent the newly minted stock from ending its first day with a loss.

The stock had been widely predicted to soar on its first day. Instead, up until the closing moments of the trading session, Facebook's underwriters battled to keep the stock from slipping below its offering price of $38 a share. Such a stumble would have been a significant embarrassment, particularly for a prominent new issue like Facebook, the most heavily traded IPO of all time.

Facebook's public debut had plenty of buzz but not much pop. The shares opened 11% higher, but soon struggled to stay above their offering price. David Benoit and Shayndi Raice have details on The News Hub. Photo: Reuters.

In the end, the bankers succeeded. When trading on Nasdaq ended at 4 p.m., the social network's stock was up just a hair, 0.6%, at $38.23.

The roller-coaster day—Facebook's shares started out jumping roughly 11%, before cooling off—was also beset by trading glitches and a 30-minute delay in the opening of trading. Nasdaq OMX Group Inc. NDAQ didn't respond to requests for comment.

Click Image To Enlarge

Facebook was also hurt by investors' high expectations of a healthy first-day pop in the price, according to people familiar with the matter. When that pop didn't happen, it prompted a selloff, these people said.

That's when Facebook's underwriters had to step in to support the company's share price, people familiar with the matter said. In particular, lead underwriter Morgan Stanley was assigned to be the deal's "stabilization agent"—meaning it was the firm's job to keep the shares above the offering price, these people said. In that role, Morgan Stanley was forced to buy Facebook shares as the price slid toward $38 in order to prevent the price from crossing into negative territory, according to these people.

Morgan Stanley, which led the platoon of 11 Wall Street banks that arranged the listing, had to dip into an emergency reserve of around 63 million Facebook shares—worth more than $2.3 billion at the offer price—to boost the price and create a floor around $38 a share, according to people close to the situation. In successful IPOs, the reserve, known as the "over-allotment" or "green shoe," is used by underwriters to meet soaring demand but in this case, it was used to prop up Facebook's ailing share price.

The process is common in IPOs and works like this: The underwriters have the extra shares available to either sell or buy for a period after the IPO. If demand is strong, they sell them like all the other shares. But if the stock price falls, they can buy them back, effectively creating a floor for the price.

Facebook's price began falling almost immediately after shares began trading. It is unclear exactly when Morgan Stanley stepped in, but traders said that the price movements throughout the day, with the shares occasionally touching the IPO price but never crossing below it, suggested the firm was active throughout much of the session.

Facebook's opening-day travails suggested how tough it can be to live up to high expectations in the market. Peter Falvey, managing director of the Boston-based investment bank Falvey Partners LLC said.

"There's been way, way too much hype, so it may be impossible not to have it be anticlimactic."

The stock's 0.6% rise was far below the first-day performance of other companies that raised $5 billion or more in their IPOs, such as United Parcel ServiceInc., which experienced a 36% first-day pop in 1999, according to Dealogic. Some Web-company IPOs over the past year, such as the social network LinkedIn Corp., more than doubled on their first days, though game maker Zynga Inc. closed down 5% on its December debut and slid a resounding 13.42% today

Still, at a market capitalization of nearly $105 billion by day's end, Facebook took its place among the nation's corporate giants. Its stock market capitalization makes Facebook bigger than computer firm Hewlett-Packard Co., and puts it in the same league as PepsiCo Inc.

At Facebook's headquarters in Menlo Park, Calif., the mood was celebratory, according to people on the company's campus. Chief Executive Mark Zuckerberg, who founded the company from his Harvard dorm room in 2004 and who is now worth $19.25 billion, rang the Nasdaq opening bell from there early Friday morning amid a gathering of around 2,000 employees.

Flanked by Chief Operating Officer Sheryl Sandberg, Mr. Zuckerberg told the crowd to remember the IPO was just one day. The 28 year old Zuckerberg, sporting his trademark hoodie said.

"Going public is an important milestone. But here's the thing. Our mission isn't to be a public company. Our mission is to make the world more open and connected."

He closed with.

"Stay focused and keep shipping."

Facebook has some recent bad news which may have concerned investors and negatively impacted the IPO:

Q1 2012 Revenues and Earnings Slump - The social network last month reported that its first-quarter sales declined from the prior quarter, and that profit also slumped, though revenue was up from a year earlier.

Effectiveness of Facebook Ads Questioned - On Thursday, May 17, 2012, Generl Motors cancelled $10 million in Facebook ads because of poor account service, and publicly questioned the utility of Facebook ads and lack of a measureable ROI.

Privacy Issues - Facebook must grapple with privacy issues as well as concerns over its strategy in mobile devices and the complex China market, among other things. In January, 2012, Facebook was placed on 20-year probation with annual privacy audits by the Federal Trade Commission (FTC) for numerous privacy violations.

"Facebook's got a great run ahead of it, but things keep moving. Platforms come and go."

For the day, however, the offering drew in investors large and small. Theophilus Hodges, a 36-year-old property manager, stopped into an E*Trade branch in downtown Chicago Friday morning specifically to open an account to buy Facebook shares. Mr. Hodges said he plans to invest $10,000 in Facebook shares, using $4,500 of his own money and $5,500 from his mother. He said.

"If it wasn't for Facebook, I wouldn't be here."

Some investors who had bought Facebook shares in private transactions in the so-called secondary market before the IPO said they were disappointed the social network didn't have a strong first-day pop. Kevin Landis of the $85 million technology fund Firsthand Capital in San Jose, Calif., which bought Facebook at about $31 a share on the secondary market said.

"If the stock were trading in the $50s right now, I might be fighting off some momentary giddiness, but I can't take giddiness to the bank."

Yet even if some institutional investors felt let down, Facebook's early venture-capital investors were jazzed. David Sze, a venture capitalist at Greylock Partners, which invested about $12 million in Facebook in 2006 at a $525 million valuation, faced criticism at the time for what was viewed as an expensive deal. Greylock now owns a stake in Facebook valued at as much as $1.15 billion. Mr. Sze said.

"No one ever believes at the beginning."

He added that his partners are "feeling very happy."

The hours leading up the IPO on Friday morning were busy at Facebook. Late into Thursday night, hundreds of employees huddled around their computer screens and goofed off, playing hockey or giving impromptu concerts.

At around 6:30 a.m. Pacific Time on Friday, hundreds more employees returned to the campus to watch Mr. Zuckerberg ring in Nasdaq's opening bell. Facebook engineers had rigged the button to automatically post the message, "Mark Zuckerberg has listed a company on NASDAQ - FB," on his own Facebook profile as he rang the bell.

But on the other side of the country, on Wall Street, traders were exasperated by a 30-minute delay in the opening of the stock, which didn't begin trading till around 11:30 a.m. Eastern. Nasdaq officials told members in a notice at noon that its staff was "investigating an issue in delivering trade execution messages" from trades made in Facebook's IPO. Around 1 p.m., Nasdaq indicated it would provide a "manual report" to brokers with information on Facebook trades.

Once the stock opened, trading was robust. More than 200 million shares changed hands in the first hour, as investors rushed in to buy, and some who had received stock from the IPO cashed out. By day's end, 571 million shares traded hands.

The glitches that beset Nasdaq on Friday helped contribute to the lackluster price for Facebook shares, according to people familiar with the snafus. One of the biggest problems, these people said, was that buyers and sellers of Facebook shares weren't provided confirmation of their trades until 2 p.m. That's akin to people not knowing how much money is in their bank account, and therefore not knowing whether to go out and spend more money or save.

COMMENTARY: Judging from the reaction of the stock market to Facebook (NASDAQ:FB) stock today, Facebook shares at the offering price of $38.00 per share were over-valued from the beginning. On Friday, FB stock never received a "pop" that could be sustained, and the price began to plummet to 38.00. If the stock underwriters had not provided the support to propup FB shares so that they would not go below $38.00, the stock certainly would've dropped well below $38.00.

So why did FB shares flop so badly? I blame the prices of FB shares on the secondary market (SharesPost and SecondMarket) for driving the price of FB shares to unsustainable levels. The secondary market deals in the sale of stocks of private companies, and shares are auctioned in large blocks of 100,000 to 250,000 shares at a time. The buyers tend to be institutional investors like hedge funds, mutual funds firms and very wealthy individual investors. The secondary market brokers hyped up FB shares to the high heavens, and were able to drive share prices to levels that could not be sustained in the public markets. Here is what I am talking about:

On SecondMarket, Facebook's pre-IPO shares traded at an average price of $42.72 in the first week of April. The last trade was April 5.

On SharesPost, the last transaction took place at $44.10 per share on March 30.

Although they were frequently badgered to reveal where Facebook shares were trading in the private market, neither SharesPost or SecondMarket disclosed the above pricing until Facebook shares began trading publicly on Friday.

Aishwarya Iyer, a spokeswoman for SecondMarket said.

"It's the way we wanted our market to be. We didn't want any external hype."

So these private-market prices were of no help to investors deciding if they wanted to buy into Facebook's IPO.

But they can help private companies raise capital by determining a market value for their shares, says Boyd Steinhoff, a vice president with SecondMarket.

But, as you can readily see, the public markets are just too smart, they knew that there is a huge difference between the private secondary markets and the public markets.

Facebook priced its shares at $38 Thursday night. They opened at $42 per share on Friday, traded as high as $45 and closed at $38.23 on the Nasdaq. FB's pop turned out to be mostly "poop," because it could not be sustained. Main Street investors said "it's too high," and the result was an inevitable plumming from $45 to $38.23.

FB shares as of Monday, May 21, 2012 at 12:34 p.m. were at about $34.00, which is closer to where the shares were trading in the secondary market prior to the FB roadshow. You cannot fool the public and Main Street investors felt from the onset that FB stock was over-priced and it is now plummeting to an equilibrium price level.

The public stock markets just closed at the Facebook stock ended at $34.03, a $4.20 or 10.99% drop from Friday's close. This is much close to the price of Facebook in the secondary markets before Facebook declared its IPO.

Facebook Inc (NASDAQ:FB) stock prices from the open of the NASDAQ stock market on Monday, May 21, 2012 to closing time. FB stock ended at $34.03, $4.20 down or 10.99% down from Friday's closing price of $38.23

Courtesy of an article dated May 18, 2012 appearing in Mashable and an article dated May 19, 2012 appearing in SFGate.com